Without diving too far into business math, let’s take a look at whether you should take the annuity or lump sum Powerball payout.
Which Is Better Annuity or Lump Sum?
Should you take the Powerball annuity or lump sum? Which one is better?
As is so often the case in finance and economics, the answer is that it depends.
What Is Powerball Annuity?
Before we can know whether lump sum or annuity is better, we need to understand the terms.
First and foremost, when they say the Powerball jackpot is $900 million what they mean is that the lottery people will buy an annuity for you guaranteed to pay you $900 million in equal payments over the course of 30 years. In other words, the lottery will buy you a 30-year annuity paying out $900 million.
Next, we need to understand that it does not cost $900 to buy a 30-year $900 million annuity.
The easiest way to understand this type of annuity is to think about a home mortgage. You borrow $500,000, but you pay back far more than $500,000 because of interest. Most people understand that concept. Now, flip it around. If you want $500,000 pay out of the account, you won’t need all of the money because you also can use the interest.
What Is Powerball Lump Sum?
So, what about the Powerball lump sum option? In this case, you get approximately $558 million all at once instead of over 30 years.
Remember when we said that the lottery officials would go get a $900 million annuity and that they wouldn’t have to pay the whole $900 million to do it? Guess how much they would need?
The lump sum payout option is approximately how much the Powerball lottery would need to buy the annuity. That is why you get a choice. The lottery simply doesn’t care. They will be paying the same amount of money either way.
Which One Is Better?
You can see that as far as spreadsheets are concerned, there is no difference in your choice. The flesh and blood reality is much different. Many lottery winners end up broke after taking the lump sum option. As strange as it sounds it can be easy to run through $558 million in just a few short years. The annuity, on the other hand, ensures that your life will be different for a full 30 years.